Despite Valeant Pharmaceuticals Intl Inc (VRX) crumbling share prices over the last year — plummeting over 80% from its August peak to close at $33 on Tuesday — analysts have remained resolute in their belief that management could and would turn the business around.
But the narrative took a decisive turn this week as even the most stubborn of bulls lined up to downgrade VRX in the wake of Tuesday’s tense fourth-quarter call.
Management slashed guidance for the current quarter and also warned about a potential default on its debt, sending the stock into another 50% downward spiral.
They now think VRX can earn $9.50-$10.50 per share on an adjusted or operating basis — a classic yellow flag.
There is a lot of dangerous wiggle room in that adjustment, and so it’s hard to trust the number at face value. Management can report any adjusted number they like, but given the $11 billion revenue outlook, odds are quite good that we’ll see another GAAP loss of $250 million, give or take 4% or 5%.
Revenue was $11 billion last year and the company lost just that amount. Now that the operation itself is under both scrutiny and pressure, it’s going to take significant discipline to avoid similar results in 2016.
What This Means for Valeant (VRX) Stock
It’s possible that management will attempt to carve $6 billion in costs out of that $11 billion pool of revenue, which is what it would take to turn last year’s GAAP loss into the adjusted guidance they’re seeking. If that’s the case, one must wonder how the company was carrying $6 billion a year in unnecessary costs in the first place—not to mention why management did not move to address it earlier. It all boils down to a credibility gap that will take time and proof of execution to fill.
In the meantime, looking at the balance sheet, there are signs of stress, but the company is still sitting on $1.4 billion in cash and enough other assets to meet its current obligations. From that, I think survival risk is overdone. VRX probably won’t be going under, and there are no signs of ultimate disaster on the horizon.
So the question then becomes this: If VRX survives this selling maelstrom, how much will it be worth? The company is still bleeding cash regardless of what the adjusted numbers say. Plus, the explosive healthcare growth that people bought into back in 2014 is a lot more elusive now; and if Democratic presidential nominee Hillary Clinton wins the election, pharmaceutical stocks may see a huge shift in both policies and sentiment.
With all the blood in the water, I wouldn’t bet the house on a bullish scenario for VRX in the near future. While the company is keeping its head above the surface, its huge debt load may restrict the flexibility it needs to snap back into shape, and the stock will likely hang around at these dismal levels for a while.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.